The Enterprise System Spectator

Wednesday, June 11, 2014

Fighting Complexity: Can SAP Run Simple?

When it comes to enterprise software vendors, SAP wants to be not just the largest but also the most simple. That’s the message behind SAP’s new theme, “Run Simple,” rolled out at its annual SapphireNow user conference in Orlando last week.

At first glance, the theme of simplicity is an odd one. For over 20 years, SAP has been widely regarded as having software that is functionally rich but enormously complex. Its name has become synonymous with implementation projects that run into the tens, even hundreds, of millions of dollars, sometimes ending in failure or at least in organizational exhaustion. SAP is easy to stereotype.

Newly appointed to the sole CEO role, Bill McDermott set the tone in his kick-off keynote: SAP customers need to “fight complexity,” to simplify how they interact with their customers, starting with how they deal with their own workforce. At the same time, McDermott acknowledged that SAP itself has been part of its customers’ complexity. But n

McDermott is an inspiring and disciplined speaker. But fulfilling this vision will take more than an inspiring keynote. In my view, if SAP really wants to beat complexity, it will need to run simple in three ways: in its products, in its ongoing support, and in how it deals with its customers. So, let’s look at each of these.

Simple Finance the First Step toward a Simplified Business Suite

On the first day of the conference, SAP announced the future delivery of Simple Finance. As I see it, Simple Finance will be a major new release of SAP financial applications (starting with FI and CO) as the first SAP Business Suite products to undergo radical code optimization to take advantage of HANA, SAP’s in-memory database technology.

Based on interviews and a demonstration I received on the show flow, I see at least three ways that Simple Finance is, well, simpler.

A simpler code base. Under HANA the applications can now simply record transactions and not have to create any summarized data fields for later reporting. With HANA, reporting always goes back to the source data in memory to build aggregated data fields on the fly. This shrinks the size of the programs, greatly reducing the number of lines of code, making them less error-prone and easier to debug. It also means that users can now drill down from summary data to details in any way they choose, without having to write special reports or customize the code.

A simpler user interface. SAP Fiori provides the user interface for Simple Finance. Fiori apps operate across desktop and mobile devices to provide a simplified user interface for SAP’s applications. They are not just a new presentation layer but in many cases combine SAP transactions into a single user process. For example, entering a manual payment in Accounts Payable can now be done in a single screen instead of the multiple screens it previously required in SAP. On a side note, after much push-back from customers, SAP announced that Fiori apps will now be delivered at no charge to customers under maintenance, removing one barrier to adoption of Simple Finance.

Simpler to implement. Implementation tools and methodologies are built right into the application, based on SAP’s previous work with its Rapid Deployment Services. These include wizard-like tools to guide and configure the applications. There are data migration tools to map data from existing systems into Simple Finance—whether from previous versions of SAP or from other systems. Implementation testing is also managed within the system itself. In addition, Simple Finance is integrated with SAP’s collaboration system, Jam, to encourage knowledge exchange. If a user runs into problems, for example, he or she can reach out to other users for help.

A date for general availability of Simple Finance has not been announced, only that early ramp-up customers are about to start implementation. Following Simple Finance, other parts of the Business Suite will also be “Simplified” until the entire product becomes a “Simple Suite.”

SAP personnel demonstrating Simple Finance appeared genuinely excited about the product. One indicated she was slated to work on implementations with early adopters. She said that she had even signed up some ramp-up customers earlier that day on the show floor, indicating a high level of interest.

I am optimistic that new prospects will find Simple Finance much more attractive than older versions of SAP financial systems. Simple Finance will be better received by midsize organizations that might have been otherwise scared off by the size, scale, and perceived complexity of SAP Business Suite. Score one for SAP.

My take: product simplification is the most straightforward mandate facing SAP. For the most part, it is only a technical challenge. SAP is loaded with software engineers, and HANA does represent a new paradigm for how business systems are architected. This is not to say there won't be bumps along the road, but I am hopeful SAP will get there.

Cloud Deployment Simplifying Ongoing Support

SAP also wants run simple in how customers keep their applications up-to-date. Like most traditional on-premises vendors, the majority of SAP customers are not on the latest releases of its products. The reason is that applying new versions (in SAP lingo, “enhancement packs”) is often a labor-intensive activity—testing the new code, retrofitting any customizations, regression testing to be sure nothing gets broken, and migrating data.

SAP’s solution is to take over these responsibilities by hosting customers’ systems in SAP’s HANA Enterprise Cloud (HEC). This program, already rolled out to some early SAP customers, is essentially a managed services offering in which SAP takes all responsibility for day to day operation of the system in SAP’s own data centers. Notably, SAP also takes responsibility for keeping the customer’s system up to date with the latest enhancement packs and bug fixes. It even supports systems with custom modifications.

The managed services offering should allow the customer’s IT personnel to focus less on technical aspects and more on business process design and effective use of the system.

My take: simplifying SAP’s ongoing support by moving customers to its managed services offering
will be more of a challenge. Only a tiny fraction of SAP’s customers are committed to this offering today. There is likely to be much inertia in SAP’s installed base about having SAP host their systems. Even though customers may be experiencing pain, many will view migration as short- term cost and effort for long term benefit. It may all come down to how SAP prices its managed services offering. If existing customers do not take up SAP on the offer, they will not experience much simplification in their SAP support experience, and SAP will retain its reputation for complexity.

Many other vendors have tried this approach—in particular, Oracle. Although most customers of Oracle Fusion Applications (Oracle’s next generation apps) are reportedly choosing the hosted deployment offering, I do not believe Oracle is seeing a mass migration of its preexisting applications, such as E-Business Suite, Siebel, JDE, or PeopleSoft, to its hosted delivery model. Will SAP’s experience be any different? I have my doubts.

Making SAP Simple to Deal With

The third way in which SAP must run simple is in its customer-facing processes. How easy is it for customers to deal with SAP? McDermott did not spend as much time in his keynote on this point, but he did emphasize it toward the end.

“Run Simple is more than a slogan for SAP--it is an organizing principle for our company,” he said. “We'll ask the tough questions: do our products and technologies run simple? Does our customer experience run simple? Are we empowering our employees to run simple? And are we enabling our customers and our partners to run simple? If not, hold us accountable.”

He continued: “For customers, we're committed to a beautiful user experience. We will make it simple to do business with SAP: simple pricing, pay-as-you-go in the cloud, simple web experience.”

Those are big promises. Anyone who has negotiated an acquisition of SAP software knows that SAP contracts are incredibly complex. Pricing is opaque, with many various types of named users defined for each product. SAP’s terms and conditions around indirect access (when other systems access information from an SAP system) are onerous.

The result is that it is nearly impossible for an SAP customer to be fully compliant. When SAP does an audit of a customer’s use of SAP products—which it has the right to do—it will find problem, if it looks hard enough.

Even finding the right person in SAP's organization to deal with is not a simple matter. Whether it is the result of having a worldwide organization or peculiarities of German corporate governance, it is difficult to understand who reports to whom, or who is responsible for what.

Lars Dalgaard, founder of Successfactors, recently commented about SAP’s organizational problems. “[SAP has] this messed up reporting structure where nobody reports to anybody,” Dalgaard said. “It’s this German thing where I didn’t even report up to Bill [McDermott] myself, I was reporting to the Supervisory Board. That doesn’t work. It just doesn’t. I mean, the COO doesn’t report up to the CEO?”

Dalgaard was positive about McDermott’s new role, however. “Someone has to be the decider, and with Bill, now they’ve got a decider on the job, I can tell you that,” he said.

The complexity of SAP’s organization not only affects customers; it affects anyone who has to deal with SAP. Talk to SAP partners, third-party developers, SAP suppliers, and industry analysts—nearly all of them say the same thing. SAP’s organization and decision-making processes are extremely difficult to navigate.

Following McDermott’s recent appointment to the role of sole CEO, SAP underwent a major reorganization, laying off an undisclosed but apparently significant number of employees. SAP claims this was not to cut costs but to better align the organization with SAP’s strategy. If so, the reorganization could be consistent with an attempt at simplification.

My take: SAP’s organization and customer-facing processes will be the most difficult to simplify. Technical simplification is an engineering problem. Support simplification can be solved if SAP can motivate customers to take up its managed services offering. But making SAP simple to deal with requires cultural change.

SAP’s culture manifests itself in how people are measured. One example: why did it take an outpouring of customer wrath for SAP to release Fiori at no charge to customers under maintenance? One source close to SAP told me that, within SAP, product groups are measured by their impact on revenue. If there is no revenue from Fiori, there is little recognition for Fiori developers. I have to believe that many SAP executives understood the opportunity in delivering Fiori at no charge. Some of us have argued that SAP stands to make more money by delivering Fiori at no charge (because it pulls through greater revenue opportunities with HANA and additional user seats). So, why wouldn’t SAP make this move sooner? If my source is correct, it is because that general lift in revenue would not be attributable to Fiori.

When you change program code, the program doesn’t fight back. But when you try to change a large organization, the organization often resists. Having a sole CEO will help, and McDermott appears determined. But has there ever been an example of a large organization that has become less complex over time?

What Does “Run Simple” Mean for Enterprise Tech Buyers

Large tech vendors change their marketing messages periodically, with no change to their core strategy, values, or culture. Is “Run Simple,” merely a branding exercise, or will it be a reality in how customers experience SAP? Time will tell.

In the short term, Simple Finance deserves consideration. In looking for new financial systems, business leaders who might have otherwise dismissed SAP as too complex should take a look at Simple Finance. New and existing customers should also investigate SAP’s managed service offering. But be prepared for continued complexity in dealing with SAP.

SAP did not become a complex organization overnight and it certainly won’t be easy to simplify. McDermott specifically told customers in his keynote to hold SAP accountable. I hope they will do that. I also hope McDermott will follow up in next year’s user conference with a progress report.

Sunday, June 01, 2014

Are Silicon Valley companies more prone to dysfunctional boards than other companies? What are the keys for ensuring that a board does not run off the rails?

These were some of the questions I asked Ken Goldman, Yahoo's CFO, last month in an on-stage interview at the Future in Review conference in Laguna Beach, CA. As someone who has served on over thirty corporate boards in his career, he had plenty to say about what works--and what doesn't--on corporate boards.

How Do You Decide Which Boards to Join?

With his extensive connections in Silicon Valley, Goldman receives many invitations to join corporate boards. But in deciding which to accept, he looks at several factors. First, he looks at who he knows on the board and whether he wants to work with them. As an active investor, he also takes interest in those where he has some "skin in the game." In addition, he has a strong preference for founder CEOs. "They have a passion that cannot be replaced," he said.

Finally, he considers whether he can add value, often with his operational experience and financial background, which makes him a logical choice to chair the audit committee.

Goldman pointed to one company that met all these criteria, GoPro, Inc., where he recently joined the board. "I know the people on the board, I like the CEO, and they have a great product," he said.

When Do You Say Goodbye?

Goldman hates to leave a board when the firm is not doing well. "I don't like to be seen as a quitter," he said. As an example, he pointed his recent departure from the board of directors at Infinera, a manufacturer of optical transmission equipment for telecom service providers. "They had some ups and downs in a tough market, but they were doing well in the most recent quarter," he said. "So it was a good time for me to leave and not be seen as bailing out."

The easiest time to leave is when there is a merger or acquisition, as investors expect board changes as part of the transaction, he noted.

Is a Tech Background Needed to Serve on a Tech Company Board?

With an undergraduate degree in electrical engineering from Cornell, an MBA from Harvard, and his long history in Silicon Valley, Goldman would seem like a natural fit for tech company boards. But is that background and experience always required?

Goldman says that tech companies often prefer to have board members with tech experience, but that's not always the case. "Chuck Schwab was on the board with me at Siebel, and now he has joined the board at Yahoo," he said. "He may not have a technology background, but he has such recognition, and having been a founder CEO himself, his experience is very helpful."

In any event, the need to have technology experience depends on the board member's role, he said.

What Are Some Examples of Well-Functioning Boards?

With his years of experience, Goldman rattled off a list of companies where he's served on well-run boards. For example, there is Starent Networks, where the board comprised some venture capital investors in addition to several independent board members. They went through the IPO process together and ultimately sold the firm to Cisco for about $3 billion.

He then pointed to NXP Semiconductors, where he joined the board just prior to the firm's IPO and saw the board playing a critical role in bringing in key personnel to grow the business. NXP went public at $14 and is now trading at about $60--a four-fold value creation, he said.

He also mentioned TriNet Group, Inc., a cloud-based professional employer organization (PEO) where the board worked with the CEO to build the executive team in every key function. "You can push and push, but if you don't have the right team in place, it won't work," he said.

At TriNet, the board was able to provide guidance to the CEO in some matters where the CEO was too close to the situation to see things objectively. "The board can add value by seeing the big picture, but not by micro-managing," Goldman said.

Later, in response to an audience question, Goldman elaborated,

In tech companies, the fundamental value add is revenue growth, so the board needs to work with the CEO on the business model and strategy. How much do you want to invest in growth versus near-term profitability? The CEO defines the strategy, and the board can help ensure that the strategy makes sense, and that the executive team is doing what it needs to do to carry it out.

Goldman agreed that with many strong personalities, it does take some time for a board to jell together. Therefore, directors should spend more time to get to know one another outside of formal board meetings. He pointed to his experience at Legato Systems, which was acquired by EMC in 2003. "As we were selling the company, we had a closing celebration in Monterey where we played golf together, and we realized how much we liked each other," he said. "It would have been helpful if we had had an event like that prior to the closing."

"Sometimes it is good to have a little R&R with the board, where you can meet and jell and get outside of the formalities," he added.

What are Some Causes of Board Dysfunction?

According the Goldman, the fundamental problem is when board members are not all on the same page. "I can tell when folks don't have a day job, because they pontificate forever," he said. "They make their board membership part of their ego, instead of having a real job. You need to have board members who have a real respect for what their role is, what it is not, and how to give advice."

However, board dysfunction is not always the fault of the board. It is up to the CEO and the lead director or chairman to not allow a board to become dysfunctional, Goldman said. "It is important for the CEO to know how to work with the board. It is also important to have a board chairman who knows how to work with the CEO, to keep meetings on schedule, and not let them go on and on," he said.

"It's good to have a little congeniality," Goldman said. "It doesn't mean you can't have a different perspective or be contrary once in a while. But if you are constantly not seeing eye-to-eye, it's probably time for you to do something else."

Goldman agreed that it's okay to rock the boat as long as you don't capsize it.

Are Silicon Valley Boards More Prone to Dysfunction?

"Some people like to bad-mouth Silicon Valley boards, and I really disagree with that" he said. "What I have seen on Silicon Valley boards is a tremendous amount of passion. We have skin in the game, we're investors, and we came to the board because we want to be there."

Goldman said that there are some differences between Silicon Valley companies and traditional businesses: Board members are often investors and not just part of the CEO's old boy or old gal network, which is often the case in old line industrial companies.

He also had nice words to say about venture capitalists, who often play a major role on Silicon Valley boards:

There's an old saying: no conflict, no interest. Venture capital guys have a lot of "interest." They are involved and engaged. So, I like to see them stay on the board as long as they can after the company goes public, even though they want to move on because they get pressure from their other partners to get out. I like to see them stay on because they know the history of the company and they understand the vision and the strategy, which are so critical. I like the continuity and their passion and the fact that they have skin in the game. They work really hard and do real work. They don't just meet to deal with governance issues.

How Do You Deal with Activist Investors?

Goldman believes activist investors are here to stay, so corporate boards had better be prepared to deal with them. At the same time, sometimes their demands can be good for the company.

There are certain times when you attract activists, and their play book is almost always the same. They look at what they perceive as excess cash on the balance sheet and giving back capital allocations. So, they push for stock buy backs, spinning off business units, and cost reduction. If you sum it up, those are probably the three major things.

But the reality is, they do add value. Their funds tend to do better than the average hedge fund. They do well for their investors.

So, you need to be prepared, have your own play book, your own advisers, and be ready. The most important thing is, don't avoid them. Listen to them, be respectful. They tend to be extremely smart. In many cases, including at Yahoo, they come with a good experience base, so I personally like to listen to them. Sometimes they may want to get on the board, which means they are now insiders, and that changes the dynamics tremendously. Sometimes they want to be on the outside and want to pull for change.

Activist investors are not all the same. Some are more operating-focused, some are just pure financial. Some want to just get in and muck-rake a little bit and cause the stock price to go up. Some may want to bring in other investors and take over to get members on the board. Others just want to get the company to do certain things....And in many cases their suggestions have been productive for the company.

What's the Story with HP's Board?

During audience questions, FiRe's conference chair, Mark Anderson, asked Goldman to comment on the situation with HP, which many consider to be the epitome of a Silicon Valley company with a dysfunctional board.

Noting that HP's former CEO and now Oracle's co-President Mark Hurd was speaking later that day, Goldman said,

I worked with Mark during the time he was at HP. I thought he did a fabulous job there, growing the company, increasing profitability, making all their numbers. But then HP brought in another CEO [Léo Apotheker] and we saw just the opposite. When companies keep missing their numbers, they make excuses.

I watched HP during the Autonomy acquisition. I blasted some of the advisers they had, and I asked, "How can you acquire a company for 25% of your market cap with cash that you don't have when it's only going to add one or two percent to your revenue?" You don't need to be a science wizard to know that's going to be hard to make work.

I don't know anything about HP that's not public....You can go back and say, Autonomy people were bad or the company was bad, but sometimes you have to go back and say, should you have done that acquisition in the first place? It's not easy to bring in a real outsider from Europe as CEO into a Silicon Valley company, into an iconic company like HP that is so proud, with such culture and such DNA and make that work. HP has gone through a number of transformations over time, so ensuring that you have the right CEO and the right board is so important.

Goldman concluded, "People like to blame the accounting, or the company being acquired, but sometimes the board just has to look in the mirror."

Register for FiRe2015

Ken Goldman was one of many speakers this year at the Future in Review conference, which focuses on the future of computing and communications, economics, education, energy, the environment, global initiatives, healthcare, and pure science. Other speakers included Vint Cerf, Michael Dell, John Hagel III, Mark Hurd, Peter Lee, Barry Briggs, David Brin, and many others. The complete list of speakers is on the FiRe website.

I'm interested in hearing about best practices, lessons learned, horror stories, and case studies of success or failure.

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